The tax issues surrounding virtual currencies are essentially a process where a gray area gradually becomes clearer.

Written by: Attorney Xia Za's team

A few days ago, the Xia Za team received inquiries from old friends regarding tax payments on virtual currencies. In summary, there are actually two questions: the first is, I made money trading coins, do I need to pay taxes in mainland China? The second is, if I keep the coins in Hong Kong (Thailand, Singapore, etc.), will that be fine, and will I be audited in the future? The Xia Za team will take this opportunity to discuss this issue in today's public account.

1. Different Tax Payment Methods for Different Strategies

The most common method is to buy low and sell high to earn the price difference. This is the simplest, calculated as capital gains. The buying price minus the selling price, after deducting handling fees and on-chain gas fees and other costs, the remaining profit is taxed at 20%. For example, if you buy coins for one hundred thousand and sell them for one hundred fifty thousand, you would pay ten thousand in tax on the fifty thousand profit. In mainland China, there is no rule that the longer you hold, the lower the tax; the tax rate remains the same even after holding for ten years.

Mining is a bit more complicated and the most controversial. If an individual occasionally mines, reporting at 20% is generally not a problem. But if a significant investment is made in buying mining machines, setting up a mining operation, and employing people to mine daily, the tax authority may view this as a business operation, applying a progressive tax rate of 5% to 35%. Of course, costs like electricity and depreciation of mining machines are deductible.

For airdropped coins, there is usually no immediate tax requirement upon receipt, as they have not been liquidated yet. However, if there is a clear market price at the time, it could potentially be classified as incidental income and taxed at 20%. When sold for actual profit, reporting is certainly required.

Staking for rewards and earning interest in DeFi currently lacks clear regulations; it may be classified as interest or business income. For smaller amounts, reporting as capital gains is usually not a problem, but for larger sums, it's best to communicate with the relevant tax authorities in advance.

Coin-to-coin exchanges must also be considered; exchanging Bitcoin for Ethereum is treated by tax law as selling Bitcoin first and then buying Ethereum. If profit is made during the sale, taxes must be paid. A reminder here: you cannot only count the coins gained, losses must also be included. Annual summaries should report net gains; otherwise, you might end up paying more tax. The reporting period is from March 1 to June 30 each year, using the individual income tax app or the personal electronic tax bureau to report foreign income. Of course, the Xia Za team would like to remind all old friends that actively paying back taxes does not imply that trading coins itself is compliant, these are two separate issues.

Is Keeping Money in Hong Kong Safe?

A very practical question is that many old friends in the coin circle keep their coins in Hong Kong, one benefit being tax savings. Hong Kong has no capital gains tax, no inheritance tax, and no dividend tax. Individuals who buy coins and hold them long-term generally do not have to pay tax on the profits when sold, which is one reason Hong Kong attracts crypto assets.

Here, the Xia Za team wants to remind all old friends that if trading frequency is particularly high, trading volume is large, or there is an organized effort in this regard—such as specifically trading coins, offering paid courses, or managing funds behind a paywall—the Hong Kong tax authority may deem you are conducting business, and profits would be subject to profit tax. The first two million Hong Kong dollars in profit is taxed at a rate of 8.25%, with amounts exceeding that taxed at 16.5%. The determination standards do not only consider the number of transactions; they will comprehensively assess whether there is a business organization and whether there is a systematic profit arrangement. Simple high-frequency trading does not necessarily constitute conducting a business.

Other income types also require attention. If a company pays salaries in cryptocurrency, employees must convert at the market price at the time of receipt to pay salary tax in Hong Kong. If a company receives cryptocurrency as payment, taxable income is also calculated based on the market price on the transaction date. Last year, Hong Kong expanded its incentives, allowing qualified funds trading virtual assets to enjoy exemptions, and the tax-exempt scope for family offices has also extended to virtual assets, attracting more institutional funds.

In the past, many believed that virtual currencies were anonymous and the tax authorities would not discover them, but this situation has changed recently. The OECD's Crypto-Asset Reporting Framework (CARF), along with the upgraded CRS 2.0, is integrating crypto assets into the global automated exchange of tax information system. In simple terms, in the future, your trading data on exchanges will be automatically reported to the tax authority in your country of tax residence.

The traditional CRS only covers banks, trusts, insurance, etc., and exchanges are not included. CARF fills this gap. Centralized exchanges and OTC traders are also bound by reporting obligations. Transactions involving exchanging cryptocurrency for fiat currency, coin-to-coin exchanges, and transfers must all be reported. Each exchange may be considered a sale for tax purposes.

The first batch of countries, including the UK and EU, will begin exchanges in 2027, while Hong Kong, Singapore, and the UAE will initiate exchanges in 2028. Hong Kong is already in the process of legislation, initiating data collection in 2027 and officially exchanging with other jurisdictions in 2028. By then, customer data from licensed exchanges in Hong Kong will be exchanged with the tax authorities in mainland China through CARF.

Of course, some old friends say that if I use a decentralized wallet and do not undergo real-name verification on exchanges, will I still be untraceable? That’s not entirely true. As long as you transfer coins from your wallet to an exchange for liquidation, the exchange will record your wallet address and identity. Coupled with on-chain analysis tools, all previous transactions made from that wallet can be traced back. Achieving complete anonymity under current technological conditions is very difficult.

CRS 2.0 also has several upgrades worth noting: shell companies and trusts must be penetrated layer by layer down to the actual controlling persons, and dual tax residents can no longer choose one place to report; both jurisdictions must report. These changes will significantly impact clients engaged in cross-border asset allocation.

3. Handling the Issue of Double Taxation

Some old friends ask whether conflicting revenue classifications between Hong Kong and mainland China could result in paying taxes on both sides. This situation needs to be addressed on a case-by-case basis. If taxes have already been paid abroad, for example, if Hong Kong determines it as operating profit and you have paid profits tax, or if US exchanges withheld taxes, you can apply for a credit when reporting in mainland China. Under the principle of source country only without item differentiation, the credit limit is based on the tax amount calculated by mainland tax law, and any uncredited amounts can be carried forward for five years.

However, many clients have a misconception: if Hong Kong classifies your gains as capital gains and no taxes are imposed, then it cannot be credited in mainland China because you have no tax paid that can be credited. This situation does not constitute double taxation; it is simply that Hong Kong does not tax while mainland China does.

Conversely, if Hong Kong regards it as operating profits and has taxed at 8.25% or 16.5%, and mainland China further taxes at 20% for capital gains, double taxation arises, and you can apply for a credit in this case. The tax burden difference resulting from classification discrepancies between the two locations is essential to determine during planning. How to design transaction structures and the arrangement of tax residency status will influence the final result.

Another point to note is that holding coins through shell companies in low-tax regions, not distributing profits for a long time, and failing to articulate reasonable business purposes can lead the mainland tax authorities to adjust and treat it as distribution through the anti-avoidance clauses in Article 8 of the individual income tax law, resulting in back taxes and penalties.

Since 2025, with the initiation of the Fourth Golden Tax Phase alongside CRS linkages, inspections on cross-border income have noticeably tightened. Regions like Hubei, Shandong, Shanghai, and Zhejiang have conducted special actions focusing on foreign securities, offshore dividends, and cross-border labor, among other areas. Some high-net-worth clients in the crypto space have already received tax risk alert messages.

Most publicly reported cases involve foreign stocks, offshore dividends, etc. The tax authorities now have a strong capacity to penetrate foreign financial assets. There was a case in Hubei where an individual used a BVI shell company to conceal domestic dividends amounting to eleven million, leading to a supplementary tax plus penalties of over one hundred forty thousand. In Shandong, a case was reported where trading US stocks through a Hong Kong broker went unreported, resulting in a supplementary tax of over one hundred twenty thousand. The technical means applied in these cases would logically be the same if utilized for virtual currencies.

Here are some practical suggestions for everyone.

First, make sure to keep transaction records. Regardless of whether they are from exchanges or wallets, every transaction's time, amount, price, handling fees, and address changes should be well recorded. After CARF is implemented, the tax authorities will have platform data, and discrepancies at that time will be problematic.

Second, report trading price differences as capital gains; do not mistakenly report them as business income. For mining, airdrops, and staking where ambiguity exists, consult professionals in advance.

Third, actively address historical issues. For incomes from previous years that were not declared, it is advisable to contact the relevant tax authorities as soon as possible to make up the reports.

Fourth, prepare in advance for CARF compliance. Hong Kong starts data collection in 2027, so there is a time window. Before then, clarify historical transactions and consider whether to make a voluntary disclosure. The cost difference between proactive and passive actions is significant.

In Conclusion

The tax issues surrounding virtual currencies are essentially a process where a gray area gradually becomes clearer. In the past few years, many have held the attitude that the law does not hold groups accountable, thinking they would not be caught. However, with the implementation of international regulatory frameworks, the maturity of on-chain analysis technologies, and the enhanced data sharing capabilities of tax authorities, these spaces are narrowing.

The Xia Za team often tells old friends not to bet on the absence of regulation, nor to wager that they are the lucky ones. The property attributes of virtual currencies are recognized under mainland legal standards; if gains are realized, there is a tax obligation, and this broader direction will not change. The tax advantages of Hong Kong still exist, but with increased transparency of information, the options for tax avoidance based on information asymmetry will become increasingly limited.

Each person's trading pattern, holding structure, and tax residency status are unique, and the corresponding risks and handling methods also differ. If the asset scale is relatively large or the trading structure is complex, it is recommended to find professionals for a comprehensive review in advance.